Aligning risk tolerance to market realities

The advent of the multi-currency system saw business models for virtually all corporates put to the test.

Report by Victor Makanda

Some chose to maintain their old models at their own peril while others had to shift or realign their business models to adapt to the new economic conditions.

Banking institutions were not spared, and the decisions made by executives on which model to pursue are now evident in the current results that have been published in the December 2012 earnings reporting season.

Banking institutions chose to be either aggressive or passive in the creation of lending portfolios at a profit.

Aggressiveness relates to bankers maintaining high loans to deposits ratios and lending to high risk clients through micro loans and to troubled companies at higher lending rates.

Most banks have been profitable through aggressive lending, though at a higher cost, considering the high credit default in the economy. Others have been aggressive yet are still reeling from the losses.

For the past four years, Barclays Zimbabwe has clearly stood out among the rest, mainly with regard to their overly passive banking model termed “the safe-banking model” relative to other bankers.

Barclays’ safe banking model is based on cautious lending, which market players attribute to an order from parent Barclays PLC since the local unit is part of a bigger group.

Barclays Capital is the parent company with a 68,67% shareholding. The group model is reflected in the low loan to deposit ratio of 17% in 2009, which, according to their latest December 2012 published results, had risen to 41% from deposits of US$224,3 million.

As at December 2009, the loan to deposit ratio for the sector stood at 49,3% as the economy was coming off a low base. As at the January 2013 monetary policy statement, this average stood at 79,79%, according to the Reserve Bank of Zimbabwe.

Barclays’ model is paying off remarkably well, considering the rising default rates due to the liquidity crisis in all sectors of the economy since 2009.

The pay-off comes from the fact that Barclays was among the beneficiaries of the flight to safety by most depositors from the seemingly perceived weak banks following the placement of Interfin under curatorship and Genesis Bank’s surrender of its licence.

The bank also got a boost at the end of 2011 when CBZ, the largest bank by depositor base was also trapped in a liquidity grind.

All these developments led to an increase in transaction volumes for Barclays, ultimately seeing a 34% growth in non-funded income to US$29,99 million in their latest numbers.

The quality of Barclays’ loan book has also been another competitive edge for the banking outfit relative to others. Their focus,which was emphasised during their results presentation, is that of concentrating on a few large loans, mainly to bigger and better corporates.

Other banks have been focusing on consumer loans making up the greater part of their loan book which has been risky considering that most economic agents are multi-borrowed.

The absence of credit bureaus means multi-borrowed customers cannot be traced.

The problem is compounded by non-performing loans, according to the central bank, pegged above 12% compared to the 5% international standard. Such lending portfolios, though attracting high yields on funds, also carry a high risk of default.

Another interesting point supporting Barclays’ prudent view has been the trend in impairments, which rose by 5% to US$532 182 for its loan book totalling US$92,04 million. Market consensus is that Barclays Bank is a bit more realistic in impairment provisions compared to other bankers.

Worth noting is CBZ, whose impairments declined by 68% to US$4,63 million for its loan book totalling US$854,70 million. The impairment decline arose in an environment where it is public knowledge that all is not well. Some paradox!

Whilst acknowledging the positives from the safe banking model, the negatives should not be ignored as they have had a huge, negative impact on Barclays’ performance since dollarisation. Chief among the negatives has been the profitability foregone.

Others have termed Barclays as operating on a “care and maintenance” basis as they managed to register marginal profits or losses in the period 2009 to 2011.

Profits have been through “special support” amounts from its head office with figures of US$6,5 million and US$7,7 million having been received in the 2010 and 2011 calendar years respectively. For a company of Barclays’ size and reputation one would have thought that in such trying times, with its financial muscle, it would have been the appropriate time for it to shine, especially when its cost of funds is below 1%.

In addition, Barclays has shed market share in both deposits and loans due to its conservative banking model.

This has seen CBZH, ABCH, and Stanchart gaining traction. CBZH has taken the advantage to become the largest bank by asset base post dollarisation, with deposits worth US$1,03 billion and advances amounting to US$854,3 million as at December 2012.

Barclays’ total deposits and loans are just 22% and 11% of CBZ’s total deposits and loans.

Such a scenario signals how the international lender has lost ground in the local economy and explains why Barclays’ current market capitalisation of US$64,38 million is 40% below CBZ’s market capitalisation of US$90,31 million.

Worse still, Barclays is now more of a mid cap stock, having been forced out of the top 10 stocks by market capitalisation due to its passive approach.

Going forward, though management are focusing on pursuing a quality loan book and increasing transaction volumes which is one of their strengths, there is need for executive management to rethink their strategy.

The need arises from the fact that the banking terrain may remain unchanged for a while yet shareholder value ought to be created even in unforgiving times.

While profits of US$2,13 million were made without support from headquarters, scope for increased profitability lies in the stance that management are taking with their model.

Surely, management should ask themselves for how long they should maintain the backseat and forego profitability when other international banks such as Stanchart, Stanbic and Cabs have reported attributable earnings to the north of US$10 million in the current spiky environment.